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Accounting Questions

Please provide an answer to the following questions below that contains 250 to 300 words for each.

1. What is the purpose of the statement of cash flows? We already discussed the Balance Sheet, Income Statement and Statement of Retained Earnings. If you wanted to invest in a company, what information would you look for in the financial statements?

2. Distinguish between the two categories of adjusting entries, and identify the types of adjustments applicable to each category.

3. Explain the matching principle and give specific examples where the matching principle needs to be applied.

Solution Preview

1. The purpose of the statement of cash flows is to, line by line, explain in detail how and why the cash position of a firm changed over the course of an accounting period. For example, consider XYZ firm. Their cash holdings, shown on the balance sheet, went from $40,000 last year to $100,000 this year. The balance sheet tells us how much the cash changed ($60,000 increase ) but not necessarily how it changed (not in an easily understood manner anyways). The statement of cash flows spells out the change showing, perhaps, that the company realized $50,000 from selling off capital asset and another $10,000 from interest earnings. Perhaps the balance was from earnings from day to day operations. This is important because $100,000 in earnings from operations is not the same as $20,000 from operations and $80,000 from asset disposal.

If I were going to invest in a company, there are several things I would look at in the financial statement. First, I would look at what I mentioned above-I would consider the past several years' profits and would want to know exactly where they came from. Is the company's sales string, or are they inflating the profits by selling off divisions? Selling off divisions isn't always a bad thing, especially if a firm is returning to its core, but the profits are not necessarily indicative of good business. Another thing I would consider would be the financial ratios from the balance ...

Solution Summary

Accounting questions are addressed including the purpose of statement of cash flows, adjusting entries, and matching principle.

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